The swinging gold sentiments pendulum

The U.S. Comex gold futures surged 1.15% on Wednesday after the disappointing U.S. Q4 GDP data was released while the Fed maintained its bond-purchase program of $85 billion a month. The futures erased all their gains on Thursday after the release of a series of U.S. economic data. The S&P 500 index and the Euro Stoxx 50 index gave back 0.65% and 1.68% respectively in the past two days. The Euro/Dollar traded as high as 1.3623 during Friday Asian morning while the Dollar Index hovered at around 79.14, falling 0.76% for the week.

Gold Reacting to Mixed Economic Data

Gold price jumped on Wednesday when the U.S. reported a -0.1% contraction in the Q4 GDP growth due to the lower defense spending and a smaller stockpile increase. The U.S. Fed announced on Wednesday that they would continue with its $85 billion a month bond-purchase program, citing further downside risks in the U.S. economy. On Thursday, the gold price dropped as the market figured that the U.S. growth would recover in Q1 and inflation is well under control. The core inflation in the U.S. climbed only 1.4% in 2012, compared to 1.9% in 2011. Despite the amount of quantitative easing around the world, many major economies are still struggling with disinflation rather than inflation. On the other hand, the U.S. ADP employment rose 192,000 in January after rising 185,000 in December. Germany's unemployment in January fell 16,000 compared to an expected 8,000 increase, indicating that the economy is recovering from the Q4 decline. The Chinese manufacturing expanded again in January with the PMI at 50.4 although slightly lower than the December level of 50.6.

India and China Physical Demand Balancing Act

The gold price in India has declined about 6% from the November peak owing mostly to Rupee's appreciation against the U.S. dollar. In addition, the government raised the import tariffs on gold from 4% to 6% and doubled the gold dore bars and ores duties to 5% last week. The import duty rise has dampened gold demand while the dealers in India have already stocked up for the wedding season. In China, gold volumes traded on the Shanghai Gold Exchange and the premiums have both risen ahead of the Chinese Lunar New Year. However, according to Barclays, the rising Chinese demand has not offset the slowdown in Indian consumption.

Data to Watch

All eyes will be on Friday's U.S. January non-farm payrolls to gauge the labor market outlook. Other events to watch will include the ECB and the U.K. interest rate decisions on Feb. 7.